ASX merger still unlikely

Does Treasurer Wayne Swan’s decision to allow
ASX Limited
to keep its monopoly over clearing and settling for at least two years make a merger or takeover less or more likely?

Opinions are divided; insiders in the ASX believe a deal is now easier. Investors appear to think otherwise, with the shares falling two days in a row.

But a consensus among well-placed observers is emerging – the Treasurer’s decision doesn’t make a jot of difference. The political hurdles to a deal are as high as ever.

“Cross-border mergers are tough," says one investment banker. “You need a lot of things to line up at the best of times. And politics is still the big issue."

Says another close watcher of the ASX: “I think it’s unlikely in the sense that the partner would have to fit the government’s criteria [of a merger of equals] and if you look at the market cap of the exchanges around the world, there’s not many candidates."

Singapore Exchange’s $8 billion takeover was killed when Mr Swan refused to approve the necessary changes to foreign investment laws. A key reason given was regulatory concerns about oversight of clearing and settling shifting offshore.

But few believe that was the real reason for Swan’s knock-back. Deals involving the ASX suffer from the hurdle of legislation that caps foreign ownership at 15 per cent. Any merger or takeover from offshore would require that law to be changed, forcing the government of the day to actively support the deal.

And with high numbers of Australians still believing the exchange is a government asset and the most likely suitor still Singapore, a merger or takeover is a hot potato that few politicians want to touch.

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A merger of equals could be politically palpable but there are no logical partners. Hong Kong and Singapore are both too large and exchanges in the northern hemisphere are more interested in each other.

ASX shareholders might complain they are not being accorded the benefits of investing in an open economy – imagine the outrage had the government said Foster’s could not be bought by SABMiller because of it being a national icon?

But few believe ASX and SGX’s argument that consolidation would bring the benefit of more capital into Australia. The healthy price to earnings ratios, especially for the largest companies, points to plenty of investable money sitting in Australia.

Banks are expensive and shares in BHP Billiton and Rio Tinto continue to command higher prices in Australia than in London (and not all of the difference can be attributed to the benefits of Australia’s franking credits regime).

Fees are also seen as reasonable. Trading fees have fallen thanks to Chi-X. Last year an Australian government report concluded that ASX’s fees for trading, clearing and settling are “broadly comparable to those of other markets of a similar scale".

Listed companies could complain that annual listing fees are a rip-off but a change of control would not make any difference. So long as most liquidity is on the ASX (as opposed to a rival exchange) then the ASX can charge what it likes.

Everyone agrees there is no chance of a deal under the current government. No one can say with any certainty that an Abbott government would make much difference. The Coalition carefully avoided revealing its views on Singapore Exchange’s initial offer for the ASX. It would take a government willing to stare down populism to approve a second tilt by the Singapore bourse.